Fed’s interest in economic recovery seems to be tapering
US Federal Reserve chairman Ben Bernanke speaks to the press following the Fed’s two-day policy meeting in Washington last week. Jason Reed/Reuters
For the most part, Ben Bernanke and his colleagues at the Federal Reserve have been good guys in these troubled economic times. They have tried to boost the economy even as most of Washington seemingly either forgot about the jobless, or decided that the best way to cure unemployment was to intensify the suffering of the unemployed.
You can argue – and I would – that the Fed’s activism, while welcome, isn’t enough and that it should be doing even more, but at least it didn’t lose sight of what’s really important. Until now.
Lately, Fed officials have been issuing increasingly strong hints that rather than doing more, they want to do less, that they are eager to start “tapering”, returning to normal monetary policy. The impression that the Fed is tired of trying so hard got even stronger last week after a news conference in which Bernanke seemed quite happy to reinforce the message of an imminent reduction in stimulus.
The trouble is that this is very much the wrong signal to be sending, given the state of the economy. We’re still very much living through what amounts to a low-grade depression – and the Fed’s bad messaging reduces the chances that we’re going to exit that depression any time soon.
The first thing to be understood is how far we remain from full employment four years after the official end of the 2007-09 recession. It’s true that measured unemployment is down – but that mainly reflects a decline in the number of people actively seeking jobs, rather than an increase in job availability. Look, for example, at the fraction of adults in their prime working years (25 to 54) who have jobs; that ratio fell from 80 to 75 per cent in the recession and has since recovered only to 76 per cent.
Given this grim reality – plus very low inflation – you have to wonder why the Fed is talking at all about reducing its efforts on the economy’s behalf. Still, it’s just talk, right? Well, yes, but what the Fed says often matters as much as or more than what it does. This is inherent in the relationship between what the Fed more or less directly controls – short-term interest rates – and longer-term rates, which reflect expected as well as current short-term rates.
Even if the Fed leaves short rates unchanged for now, statements that convince investors that they will be going up sooner rather than later will cause long rates to rise. Sure enough, they have shot up since the tapering talk started. Two months ago, the benchmark interest rate on 10-year US government bonds was only 1.7 per cent, close to a historic low. Since then it has risen to 2.4 per cent – still low by normal standards, but this isn’t a normal economy.